A New Approach to U.S. Economic Policy

The recent news that no jobs were added to the U.S. economy in August indicates the depth of the current recession. Meanwhile, the U.S. stock market and economy have been sustaining major gyrations and uncertainty due to an uninformed and misguided battle over the budget deficit and national debt among ideologues in the House of Representatives.

The problem was further exacerbated by the rating agency Standard and Poor's when it erroneously downgraded U.S. credit standing from AAA to AA+ for the first time in history despite the U.S. impeccable record of meeting its debt obligations.

We believe that there was some confusion among the ideologues concerning our economic problem. They should have addressed the Great Recession that began in 2007 and the ensuing unemployment rate of over 9 percent that has lasted for four years. In fact, while there is much current debate as to whether there would be a "double dip," in our view we are still in the first economic dip and we should be taking aggressive actions to counter it.

The policy focus should have zeroed in on reducing the unemployment rate that would ultimately reduce the budget deficit and address the issue of the national debt. The policy sequence should have been to first reduce the unemployment rate and then reduce budget deficit. Instead, the ideological battle was over deficit reduction.

By focusing on budget deficit reduction first, as demanded by the ideologues on the right, the unemployment rate will, in our judgment, rise to double-digit levels, which would clearly be disastrous for the economy. Likewise, the ideologues on the left demanded a rise in taxes paid by the rich. That policy is also counterproductive because at times of recession income taxes should be lowered not raised on any income group.

As we see it, the U.S. economy never emerged from the 2007 recession and the NBER (National Bureau of Economic Research) Dating Committee was mistaken in suggesting that the recession ended in June 2009. That assessment was incorrect, given the persistent unemployment rate, the foreclosures, the corporate and personal bankruptcies, the unprecedented "For Lease" signs on commercial properties, the financial difficulties sustained by almost all states and cities, etc.

If the recession is not reversed it could continue for a decade just as in Japan's "lost decade." An additional harm of such a long-term recession is that it will cause many workers to lose their skills as unemployment duration is prolonged, leading to a reduction in productivity.

What Should Be Done?

Undoubtedly there is an urgent need to create jobs and to boost economic growth. However, the partisan tension has not dissipated in light of the prospective presidential election. The government has the following policy options:

1. Monetary Policy. The Federal Reserve has already reduced short-term interest rates to essentially zero and has promised to keep them there for the next two years. It could possibly attempt to reduce medium and long-term interest rates by purchasing medium and long-term instruments as was done by its recent policies of "quantitative easing" but these policies have not significantly stimulated lending or job creation.
2. Fiscal Policy. Assuming that President Obama prevails, jobs could be created by direct federal expenditures and tax incentives, two major fiscal instruments. The Republican opposition will continue to argue that fiscal expenditures do not work and add to the deficit. However, the counter argument is that stimulus expenditures probably prevented the economy from sliding from a great recession into a full depression. In contrast to previous attempts, this time around any stimulus expenditures must be directed at job creation, as President Obama has promised.
3. Economic Growth. The ultimate target of a healthy economy would includes a low unemployment rate of 4 percent or so instead of the current 9 percent along with a low and stable price rise, with inflation at around 2 percent or so, as well as an annual GDP growth rate of 3 percent or better instead of the current 1 percent.
4. Ending Our Wars. The budget deficit is caused by wars and recession. The U.S. is still in the midst of major wars in Iraq and Afghanistan as well as smaller wars in Pakistan, Yemen, and elsewhere. These wars are not of high priority so far as our national security is concerned, but they are very costly. For instance, there are over 100,000 U.S. soldiers now in Afghanistan and each costs some $1 million per year. Damages stemming these wars in lives and wealth are reaching enormous proportions when measured against our national security interest. These senseless wars must be ended and replaced by program of job creation. A transition from wars to domestic employment is needed to achieve a reduction in our current unemployment rate from some 9 percent to below 6 percent.
5. Education Enhancement Programs. There is a need to create upgraded jobs, including those based on high technology, and train the labor force for these jobs through enhanced education and training. Our educational institutions must expand their capacity for enrollment and prepare students for the 21st century global market as the U.S. labor force is competing on a global scale.
6. Private Sector Shared Responsibility. Private sector participation in creating and sustaining high paying employment is an absolute necessity. During the early part of the current recession the private sector sat on the sidelines and did not forcefully contributed to job creation and training. The banks held on to liquid cash and did not extend loans to small businesses and investors.
7. End the Battle of the Ideologues. The battle of the ideologues must be changed from harmful contention to healthy competition. Otherwise, the economy could remain mired in recession.
8. Infrastructure Restoration: We need to restore and rebuild our infrastructure of roads, bridges, etc. that has not been done with a policy of "deferred maintenance" leading to falling bridges, exploding pipelines, etc.
9. Bailouts of State and Local Governmental Units: As in the old revenue-sharing idea and as in the Bush-Obama bailouts of the largest banks and major corporations and also supporting people who have been foreclosed.
10. Government As the Employer of Last Resort: We need to set up FDR-like agencies like the CCC, WPA, etc. and make the Federal Government the employer of last resort, guaranteeing employment for all seeking jobs, with the government as the employer of last resort, much as we had in the Roosevelt programs during the Great Depression.

*Nake M. Kamrany is Professor of Economics at the University of Southern California and Michael D. Intriligator is Professor of Economics, Political Science, and Public Policy at UCLA.